Ch 9

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Break-even analysis

A technique to analyze the relationship among revenues, costs, and volume. It is also called cost-volume profit or CVP analysis

Relevant Range

The range of activity over which total fixed costs or per unit variable cost (or both) do not vary.

Fixed costs

Costs that stay the same in total over the relevant range but change inversely on a per unit basis as activity changes

Step-fixed costs

Costs that increase in total over wide, discrete steps

Variable costs

Costs that stay the same per unit but change directly in total with a change in activity over the relevant range. Total variable cost= Variable cost per unit X Number of units of activity

Target Costing

Controlling costs, decreasing profit margins, or both to meet or beat a predetermined price or reimbursement rate

Break-even point

The point where total revenues equal total costs

Contribution Margin Per unit

Per unit revenue minus per unit variable costs

Incremental Costs

Additional costs incurred solely as a result of an action or activity or a particular set of actions or activities

Total contribution Margin

Total revenues minus total variable costs

Contribution Margin Rule

If the contribution margin per unit is positive and no other additional costs will be incurred, then it is in the best financial interest of the organization to continue to provide additional units of that service even if the organization is not fully covering all of its other costs. On the other hand, if it is negative it is not in the best interest of the organization

Avoidable Fixed cost

A fixed cost that is avoided if a service is not provided. Example: Full-time nursing costs save if a service were closed

Nonavoidable Fixed Costs

A fixed cost that will remain even if a particular service is discontinued. Example: Full-time nursing costs in an organization that will continue, even though one of several services is dropped

Common Costs

Costs that benefit a number of services shared by all. Example: rent, utilities, and billing. Also called joint costs

Product Margin

Total contribution margin - Avoidable fixed costs. It represents the amount that a service contributes toward covering all other costs after it has covered the costs that are there solely because the service is offered (its total variable cost and avoidable fixed costs) and would not be there if the service were dropped

Product Margin Decision Rule

If a service's product margin is positive, the organization will be better off financially if it continues with the service, ceteris paribus. Conversely, if a service's product margin is negative, the organization will be better off financially if it discontinues the service, ceteris paribus